Smith & Nephew lifted by rival's results, but FTSE dips again

Wednesday 8 April 2009 12.18 EDT
First published on Wednesday 8 April 2009 12.18 EDT

Medical equipment group Smith and Nephew was in demand as US rival Biomet reported better than expected profits, easing fears that the global downturn would hit sales of its hip and knee products.

Biomet said third quarter sales grew by 7% overall, and by 10% in the key US market. Reconstructive (hip and knee) sales grew by 10% worldwide. The news prompted Deutsche Bank to issue a buy note on S&N with a 665p price target, saying:

"We expect shares in S&N to react positively to the news that Biomet's reconstructive sales still grew by 10% worldwide organically in the quarter ending February 2009, despite a much tougher comparison.

"We consider that investor expectations for S&N are extremely low and the current share price is discounting at least a 37% earnings downgrade verses other defensive healthcare names and cyclical medtech names that we believe is unjustified. [S&N's recent share price decline] has been partly driven by concerns about the negative impacts of the economy that would lower volumes and put pressure on prices of orthopaedic implants. Biomet's results should relieve some of these concerns."

S&N closed 27p higher at 450p.

Overall the market was struggling for direction ahead of the long Easter weekend. The FTSE 100 initially climbed to 3940, but finally finished 5 points lower at 3925.52. Wall Street also made an uncertain start, but was in broadly positive territory by the time London closed, lifted by news of US government aid for life insurers and a proposed $1.3bn housebuilding merger between Pulte Homes and Centex.

The suggestion by the likes of billionaire investor George Soros and Morgan Stanley's strategists that the bear market is not over continues to cast a shadow over sentiment. Traders said there was likely to be continued uncertainty as the US reporting season gets into full swing next week, when some of the major banking groups report their figures.

Among the UK financials, HSBC fell 5p to 437p as Societe Generale restarted coverage of the bank after its recent £12.5bn rights issue with a sell recommendation and 365p price target. It said:

"The economic downturn will slow pre-provision profit significantly (as well as the drag from the US business wind-down), and sharply rising unemployment will increase impairment charges further. We are forecasting net income of $4bn in 2009 and $8bn in 2010. But we do not see HSBC earnings returning to the 2007 peak of $19bn before 2012."

Royal Bank of Scotland edged down 0.6p to 26.1p and Lloyds Banking Group lost 1.2p to 71.7p.

Real estate investment trusts and housebuilders were also lifted by positive analyst comment. British Land was 28.2p better at 418.5p, Land Securities closed up 28.5p at 516p and Liberty International added 22p to 417.25p after Nomura analyst Mike Prew raised his price targets on the sector's constituents by an average of 9%. Barratt Developments rose 10p to 128.25p as KBC Peel Hunt issued a buy note on the business in the wake of Taylor Wimpey's announcement about a debt refinancing. KBC suggested Barratt could raise £500m to reduce its borrowings with a deeply discounted rights issue. At the same time Goldman Sachs upgraded Barratt from neutral to buy, saying:

"We expect the Barratt share price to rerate over the following 12-18 months as average house prices are expected to trough in the first half of 2010 - we expect this to be the key catalyst in lowering the risk of further deterioration in Barratt's net debt position. A near-term rerating in the share price is however dependent on an improvement in the company's net debt to be more in line with the net leverage levels of the rest of the group – we believe this will be more dependant on an equity issuance which cannot be forecast in the current environment."

Goldman also lifted its recommendation on Redrow - up 14.5p to 191p - from sell to neutral. As for Taylor Wimpey, it closed up 3.25p at 43p, with talk it may tap shareholders for £350m, although any rights issue would be less dilutive than investors had earlier feared.

Set top box maker Pace powered ahead 42p to 141.5p after Tuesday's after hours trading statement, which indicated its results this year were likely to be ahead of expectations, prompting buy notes from a host of analysts, including Altium Securities, FinnCap and Royal Bank of Scotland.

Mining group Rio Tinto rose 83p to £22.43 after it said in Australia it knew of no reason for the recent fall in its share price. There has been much talk in the market that the company was considering an $8bn cash call if its controversial $19.5bn investment from Chinalco fell threw. But Rio said it was committed to completing the Chinese deal.

Drinks companies were hit by a negative note from Exane BNP Paribas, which cut its target price on Diageo - down 16p at 782p - by 25% to 774p and on SABMiller - off 17p to £10.57 - by 16% to 900p.

Broadcaster ITV slipped 2.25p to 25p as Numis put a 26p target on the shares and a hold rating, after a meeting with chief operating officer John Cresswell and finance director Ian Griffiths. Numis said:

"ITV believe they are currently outperforming the market. The group reiterated that they have no immediate financing needs and the next repayment (€500m, hedged to £335m) is in 2011. They are discussing debt reduction with investors. Potential disposals include Friends Reunited, [Freeview business] SDN and the company's 50% share of Screenvision US.

"[But] the speed and savagery of the economic downturn combined with the high operational gearing inherent in free to air broadcasting continue to have a devastating impact on ITV's earnings, exacerbated by debt and pension issues. We have yet to see any stabilisation in advertising and are retaining our hold recommendation. However, we highlight the potential upside of both a reduction in debt (possibly through a rights issue) and the impact of a relaxation of the regulatory environment."

Lower down the market, oil and gas group Regal Petroleum dipped 1.75p to 51.25p despite traders reporting bid rumours, with BP TNK one name in the frame and a price of 125p-150p mentioned.